Heat Is On PG&E's Rate-Hike Request

Kenneth Howe, Chronicle Staff Writer

Published 4:00 am, Monday, August 31, 1998

Energy deregulation -- which promised lower electricity prices -- is barely five months old, yet Pacific Gas and Electric is already lobbying state regulators for the biggest utility rate increase in more than 16 years.

Should the $1 billion-a-year rate increase be approved, it would go into effect January 1999 and cost consumers about $120 more a year. That amount would more than wipe out any gains consumers have made from the state's recent experiment in free-market electricity.

PG&E first broached the topic of raising rates last September, saying it needed the money to improve safety, reliability and customer service. But lobbying began in earnest a week ago when the California Public Utilities Commission kicked off the start of eight weeks of hearings on the subject in San Francisco. A decision is expected early next year.

"We recognize a billion dollars is a lot of money," said Bill Blastic, PG&E's manager of distribution operations. "But customers demand safe, reliable, responsive service, and it costs money to do that."

Blastic noted that in 1995, PG&E was harshly criticized by regulators, the public and the media for its slow response in handling repairs following the 1995 storms. Yet the following year, based on a decision made back before the storms, PG&E's rates were slashed by $300 million annually.

Trying to improve its system with less money, PG&E says it leaned heavily on investors. Now, says Blastic, it's time for customers to pay their full share, particularly because PG&E's customer base is growing, thanks to California's strong economy.

But the Utility Reform Network, a San Francisco consumer group that tracks utilities, is outraged by the amount of money PG&E wants, and it has charged the utility with attempting to "set a new standard for chutzpah" in asking for the money.

vestors, is simply trying to boost profits. The group points out that PG&E is asking the PUC to increase rates so that the utility can earn 12.1 percent on its equity, up from the previously authorized 11.2 percent.

Earlier this year, TURN and the Office of Ratepayer Advocates, the PUC's consumer protection arm, suggested cutting PG&E's return to 8.64 percent for electricity and 9.32 percent for gas.

Moreover, many observers think PG&E may be trying to position itself favorably for a new performance-driven standard that would govern future rates. Getting high rates now would establish a benchmark off which future rate increases would be granted.

California opened up the market for generating electricity back on March 31. But it didn't deregulate the distribution of electricity and gas -- getting it to people's homes through wires and pipes.

PG&E still does that job as a regulated monopoly. As such, it must get approval for rate increases from the PUC. Every three years, in what has become a long and contentious ritual, PG&E argues its "rate case" before the PUC, generally hoping to get approval to raise rates.

This year, PG&E wants to boost natural gas rates by $460 million a year. That would bump up the average consumer's gas bill by $10.33 a month, or 25 percent, to $48.22.

The big components of the gas rate increase include:

-- $200 million to replace aging main gas pipelines, local service lines and meters, some of which were installed back in the 1930s.

-- $60 million to expand customer call centers and pay for 500 new service and field representatives.

-- $30 million for continuing operations and maintenance.

-- Much of the rest would go for taxes, administration expenses and other expenses.

For electricity, PG&E is asking for a 10 percent revenue increase that would generate $572 million more annually. This includes:

-- $300 million more a year to replace aging poles (about 250,000 a year), lines, substations and transformers.

-- $100 million more a year to trim some 2 million trees annually so that power lines don't come into contact with branches, setting off sparks and possibly igniting fires.

-- $100 million more a year for customer service representatives and field workers.

The good news for electricity customers is that even if this rate case is approved, electricity rates would not go up. That's because under the terms of deregulation, electricity rates were cut 10 percent and then frozen for four years by the state Legislature.

The bad news is that the boost in PG&E's electricity revenue would still cost consumers hundreds of millions of dollars anyway. That's because electricity rates were expected to decline, perhaps even sharply. While PG&E's request would not raise rates, it would prevent rates from falling to a lower level any time soon.

And keeping rates up appears to be PG&E's plan.

In a speech to officers last May, PG&E Co. CEO Gordon Smith outlined several goals to managers. "Specifically," he said, "we need to ensure the rate freeze is continued through 2001 . . ."

A spokesman for the utility said PG&E is simply trying to get funds to pay for the work that needs to be done.

PG&E's prospects for getting its full gas and electricity rate increases, however, don't appear especially good. Privately, at least one PUC commissioner expressed reservations about PG&E's rate increase because it was so high.

Publicly, the PUC's Office of Ratepayer Advocates blasted the utility earlier this summer. ORA said it would recommend that the PUC ignore most of PG&E's $1 billion request and allow the utility to collect a paltry $5 million more a year.

"They are simply asking for far more than they need," said Martin Lyons, project manager for ORA. "In some cases," he said, "PG&E is asking for 10 times the amount they need" to meet expected growth levels.

A thumbs down by ORA doesn't necessarily mean the PUC won't give PG&E something. The PUC's five commissioners, who are expected to decide on the rate case late this year, sometimes ignore ORA's advice.

Historically, ORA calculations show, the utility gets between 30 to 40 percent of its original request from the PUC. PG&E already has scaled back its request from the original $1.3 billion.

But downsizing the rate hike hasn't mollified consumer groups. Both TURN and ORA disagree significantly with PG&E over calculations on how much money it needs.

The largest area of dispute is over depreciation expenses that PG&E wants to recoup. Depreciation is the using up or wearing out of an asset, like a power plant or a telephone pole.

"PG&E's big pitch is that they need $1 billion for reliable service," said Theresa Mueller, a TURN attorney. "But their budget to replace pipelines and poles includes an inflated $400 million in depreciation expenses," much of it associated with taking down old equipment. "What does depreciation have to do with reliable service? Depreciation doesn't bring electricity to your house or put a pole in the ground."

Mueller argued that the depreciation expense to tear down old lines often was three times what it cost to put them up.

Blastic of PG&E said the depreciation figure was actually more like $285 million and that it was a legitimate expense. He said it partly covered the expensive work of disposing of equipment that is no longer usable.

"You can't just throw old utility poles in a Dumpster, you know," he said.

Both TURN and ORA also object to granting higher utility rates on other grounds. They say that AB 1890 and subsequent legislation, which kicked off electricity deregulation, already granted PG&E some $242 million to improve its distribution systems.

PG&E acknowledges getting that money but adds that those were onetime funds that have been used up.

Another area of contention is the tree- trimming costs. PG&E wants $100 million more a year, while ORA says it only needs $65 million. Some consumer groups think PG&E should get no increase for a few years. They complained that PG&E under- spent on tree-trimming money for years and took the money it was granted for that work and siphoned it off into the profit column.

PG&E has denied the charge.

But underlying the specific disputes over particular expenses is a more general disagreement.

The utility -- whose revenues were cut back in 1996 -- argues that it needs more funds to bring its service levels up to expectations.

For example, a growing economy has created new PG&E customers. The utility forecasts 46,500 new gas customers in 1999 alone. Large amounts of up-front money are spent on each new customer, said Blastic. In fact, he maintained it takes 30 years of rate paying to finally recoup the full expense of bringing gas and electric service to a new home.

But Lee Selwyn, president of Economics and Technology Inc., a Boston consulting firm, thinks PG&E also is trying to "bulk up" so that it can be more competitive in a deregulated world.

TURN's Mueller also charges that "PG&E is just trying to pad its case by putting in expenses that just aren't necessary." And there is a reason why the utility is doing it, she said.

The state regulators plan to change the way they decide on PG&E rates. No longer will the PUC hold extensive hearings every three years to argue whether a utility's rates should go up or down. Instead, regulators will adopt so-called "performance- based rates." Under this system, rates would be adjusted by a certain percent each year based on a formula that would include various performance measurements and the consumer price index.

Any percentage-rate increase would be based on the rates PG&E charges when the system goes into effect. Thus, it's to PG&E's advantage to get rates as high as possible before the new program begins.

But the charges that the utility is trying to "gold plate" its system or raise the benchmark as a way to boost future rates exasperates Blastic.

"We've been taking the hit to earnings in order to make investments that customers say they want," he said. "Now it's time for ratepayers to do their part.

"In order to keep up this level of service, there has to be a bigger investment" by ratepayers, he said.

PG&E points out that it has at least 200 businesses and individuals that are backing its quest for a rate increase.

"Based on what we've heard, we support what they're looking for," said Mark Mosher, staff director for San Francisco's Committee on Jobs, which represents the 35 largest businesses in the city.

Mosher argued that companies doing business in San Francisco are keenly concerned about the reliability of their electric system. The reason: The city is not only prey to natural disasters, but is home to many firms -- whether high-tech or financial -- that rely on the steady flow of power.

"I think folks are willing to pay a premium to have fewer outages," he said.

But not everyone feels that way. The PUC's Office of Public Advisors has received several thousand letters, e-mails and other correspondence on PG&E's request. The responses are 4 to 1 against the rate increase.

PG&E'S RATE REQUEST/AT A GLANCE

PG&E is asking the Public Utilities Commission to boost rates by $1.032 billion a year, starting in 1999.

The San Francisco-base utility wants rate hikes for natural gas of $460 million that would push up consumer's gas bills by $10.33 a month.

Some major pieces of the gas rate increase would include:

-- $200 million to replace aging main gas pipelines, local service lines and meters.

-- $60 million to expand customer call centers and add 500 new service and field representatives.

-- $30 million for on-going operations and maintenance. For electricity, PG&E is asking for $572 million more annually. This increase wouldn't raise rates because a freeze is in effect, but it would postpone rate decreases. PG&E wants:

-- $100 million for customer service representatives and field workers. Source: PG&E

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